The Internal Revenue Code dictates there are no
employee substantiation requirements if an employer
distributes a transit pass, including a voucher or
similar item to employees. The code also says an employer
reimbursement is a qualified transportation fringe
benefit if no voucher or similar item is available to the
employee in exchange for a transit pass.

The new ruling provides that smart cards and
terminal-restricted debit cards are considered vouchers
since amounts credited to the cards are only allowed to
be used for transportation fares. Amounts applied to
these cards within the code’s limits are excludable
from gross income, and since the cards can only be used
for transportation fares, no employee substantiation for
charges on the card is required.

The ruling also addresses the use of merchant
category code (MCC)-restricted debit cards as a
transportation fringe benefit. The IRS determined that
these debit cards may be used as a qualified
transportation fringe, but only where another voucher is
not readily available. Also, the card agreement must
qualify as a “bona fide reimbursement
arrangement,” making employee substantiation of
charges to the card necessary.